By Mesha
There’s a lot of crypto buzz going around, and indeed, for all the right reasons. And if you have been following the trends, the value of NFTs has exploded. Some unique features of NFTs make them extremely popular.
The NFT market is worth approximately $22 billion. And it’s the right time to join it. But, before you get into NFT investing, you should know what drives the value of NFTs up; it would help you make the right investment choices that are not just based on guesswork.
Let’s get started.
What are NFTs?
An NFT or a non-fungible token is a data unit stored on a blockchain that cannot be replicated or replaced. It represents virtual assets and real-world items, such as graphic artworks, pictures, music, games, sports collectibles, fashion items, and even real estate. It can be utilized across multiple platforms, so it can be traded easily through secondary markets.
NFT Features
Let’s learn a more about NFTs:
Ownership History
NFTs consist of metadata, which is the digital asset’s information and its contract stored on the blockchain. And the ownership history is part of this information.
The value of the NFT increases if it’s owned by someone that has more credibility in the market, for example, an MNC, a famous artist, a celebrity, etc. So, in your NFT investing research, make sure to include NFTs that are owned by enterprises or people with substantial brand value.
You can also resell NFTs previously owned by influential people. Just make sure to provide a tracking interface so the buyers can find the previous owners’ information.
Rarity
NFT items are ranked by rarity i.e., scarcity. The rare digital assets may be artworks by recognized illustrators or tokens minted by the top celebrities. The rarer the NFT is, the more its value would be.
If you want to discover rare NFTs, you can look for:
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The artist of the NFT and their brand value
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The technique used to make the digital asset
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The current or potential impact of the NFT on the user
A good example would be the first-ever tweet by Twitter’s CEO, Jack Dorsey, which was converted into an NFT and sold for $2.9 million.
Liquidity Premium
NFTs with high liquidity have a higher value since they allow buying and selling in a frictionless manner. And traders prefer investing in NFTs with a high trading volume because the more the liquidity, the easier it is to take profits. Moreover, an NFT with high liquidity often retains its value even when the secondary market platform is closed.
Because of the value associated with liquidity, the in-built system depreciates those NFTs that have been idle for a long time. This makes way for competitive assets. The system will further support the liquidity of assets as the market grows.
Tangibility
Some NFTs represent real-world objects, which increases its value in terms of tangibility, which further increases by ownership immutability. This means that the ownership rights on anything can be solidified with an NFT. However, an NFT-backed object is not always unique or rare.
You must determine its demand, scarcity, and the personal effect it has on users. For example, in an NBA NFT marketplace, the value of NFT collectibles of NBA games depends on whether the game is a finals game, the players involved, the stage, etc.
NFTs with tangible value usually have expiry dates and are, thus, suitable for short-term investments.
Interoperability
Interoperability is the ability to use a token in different applications. It’s a key factor in the NFT value because it has increased the use cases of tokens. For example, NFT game players worldwide play one game, which requires a massive ecosystem of use cases and games. That’s something!
Another way interoperability increases the value of NFT is how easy it is to build partnerships so that multiple parties can benefit while also increasing the use-cases of an NFT. For example, an NFT weapon can be used in different games. And since the NFT ownership is already established, the parties need not do much to form partnerships.
Speculation
Sometimes, speculation can drive the price of the NFT up. It can undoubtedly become a trivial catalyst in price appreciation if not wholly responsible. For example, in 2017, the price of CryptoKitty #18 surged from 9 ETH to 253 ETH in merely three days.
The speculation comes naturally to humans. Anything like price performance charts, changes in the NFT asset, and even certain uncontrollable events can give rise to speculation and drive the NFT prices high. Though one line of thought opposes this idea, it isn’t impossible to believe that speculation is becoming an essential component in the NFT ecosystem.
Future Value
The future value of an NFT is determined through its future cash flow and valuation changes. And valuation, as just discussed, is driven by speculation (one of the critical NFT components).
Another factor that contributes to price appreciation is ‘scarcity.’ Together, these factors can increase the NFT value and attract new investors. For example, StockX, a sneaker marketplace has a $1 billion valuation partly because of the rarity component; it creates a rare sneaker market where people are encouraged to speculate on the price.
Understanding NFTs is not difficult if you have these key points right. Though booming already, the NFT market is expected to grow larger continuously. And as it grows, it will also change. Make sure to stay on top of your game.
I hope this was helpful!
